Reaffirmation agreements are perhaps one of the most controversial documents considered by Chapter 7 bankruptcy applicants. As long as their bankruptcy application process is pending and the court has not yet released a discharge notice, debtors may opt to sign a document to reaffirm certain debts. By doing so, each debtor removes the possibility of discharging what they owe and instead commits to paying it. Why would anyone choose to do that?
Most bankruptcy filings fall under Chapter 7 as it can wipe out most if not all debts. Chapter 7 bankruptcies provide debt relief in two ways. First, it places your assets in a bankruptcy estate and allows a trustee to liquidate it to pay off your secured debts. Second, your unsecured loans are generally forgiven.
Applicants must first pass a means test to qualify for personal bankruptcy and have their debts discharged subject to state law and exemptions. A reaffirmation agreement comes into the picture if you want a specific type of debt to not be included in your bankruptcy case. Below are three main advantages of considering to sign a loan reaffirmation.
Reaffirmation Agreement Stops Repossession
Forfeiting bankruptcy protection is often a deal brokered with your creditor in exchange for stopping any plans for repossession or seizure of your property. Reaffirming your debt is not a good idea if you don’t have the legal knowledge about this process or if you haven’t explored your other legal options. Moreover, reaffirmations usually work for secured debts only since creditors have the right to reclaim any collateral in case of delinquent payments.
If you defaulted on a secured debt and your loan contract has an acceleration clause, then you can expect to repay a higher amount. Generally, you have the legal obligation to pay your lender equivalent to the entire loan amount. In case you are unable to pay, then your creditor may get back any collaterals such as a home or a car. If you really want to keep these properties, you can opt to sign a debt reaffirmation. However, make sure to consult with a bankruptcy lawyer before doing so.
Reaffirming Debts Help Keep Collaterals
This court-approved agreement between the borrowers and lenders ensures that any collateral on the reaffirmed debt is kept even after bankruptcy proceedings are done. After your bankruptcy case, you will need to make sure that your payment for the secured loan is on schedule. These will be reflected in your credit report which means that late payments can lead to a bad credit score.
Just to clarify, a formal reaffirmation agreement prevents repossessions as long as you are current on payments. The moment you lapse on your monthly payments, debt collectors can move to reclaim the property and can even file a lawsuit against you to collect your past-due and remaining balance. This is why it is important to have a stable source of income and the financial capacity to pay off your loan before agreeing to reaffirm a debt. Find an experienced bankruptcy attorney who can evaluate your case and recommend if keeping your debt is a good decision.
In some cases, the bank or financing company allows debtors to keep paying and preserve the lien without a formal court document. Though this may offer some form of property protection, it cannot legally stop any repossession efforts in the future.
Reaffirmation Can Protect Your Possessions
Chapter 7 bankruptcy attorneys are knowledgeable about which of your debts can be considered dischargeable or nondischargeable by the bankruptcy court. Since your previous bankruptcy records, bankruptcy chapter, and personal circumstances affect whether reaffirmation will work to your advantage or not, you should make sure to get legal advice from a reliable source.
Debtors working with bankruptcy lawyers receive extra help in renegotiating the terms of their loan and often arrive at a lower principal amount and interest rate to pay for. Moreover, a lawyer helps check that your property will be protected from any collection activity, foreclosure, repossession, or harassment in the future.
Thinking about filing bankruptcy and reaffirming a debt? WantAFreshStart, LLC understands that economic slowdown has hurt the finances of many people. Our bankruptcy attorneys are here to help you figure out the best route towards a renewed financial independence. Call us to schedule your free initial consultation.